Tax Analysis Based on Cases

On September 27, 2000, Hengyang Rongsheng Real Estate Development Co., Ltd. (hereinafter referred to as 'Rongsheng Company') issued dividend IOUs to Chen Mouping and Zhang Moujin, but only paid 40,000 yuan in dividends by May 25, 2006. For this reason, Chen Mouping and Zhang Moujin filed a civil lawsuit with the Shigu District People's Court of Hengyang City. The Hengyang Intermediate People's Court made a civil judgment ([2011] Hengzhongfa Civil Second Instance No. XXX) on August 15, 2011, ordering Rongsheng Company to pay Chen Mouping and Zhang Moujin 160,000 yuan in dividends and interest. During the execution of the case, the Shigu District People's Court of Hengyang City issued a report on January 14, 2015, regarding the calculation of interest in the case of Chen Mouping and Zhang Moujin versus Hengyang Rongsheng Real Estate Development Co., Ltd. regarding profit distribution. Rongsheng Company (later renamed Hengyang Shunxiang Trading Co., Ltd. ) declared and withheld a total of 79,288.2 yuan of individual income tax on Chen Mouping and Zhang Moujin's dividends to the Shigu District Taxation Bureau twice on February 17 and August 27, 2015, according to the report and the final civil judgment of the Hengyang Intermediate People's Court and other relevant materials. The Shigu District Taxation Bureau issued tax payment certificates numbered (141) Xiangdi Shui XXX and (141) Xiangdi Shui XXX to Rongsheng Company and Shunxiang Company on the date of declaration. Chen Mouping and Zhang Moujin were dissatisfied after learning that their due dividends had been levied 79,288.2 yuan in individual income tax by the Shigu District Taxation Bureau, and filed an administrative reconsideration application with the Hengyang Taxation Bureau on September 22, 2015. The Hengyang Taxation Bureau made a tax administrative reconsideration decision Hengdi Shui Fu Jue [2015] No. 24201 on November 22, 2015, upholding the tax administrative act of the Shigu District Taxation Bureau's tax levy on Chen Mouping and Zhang Moujin. Chen Mouping and Zhang Moujin were dissatisfied and filed an administrative lawsuit, requesting the court to revoke the tax payment certificate of the Shigu District Taxation Bureau and the tax administrative reconsideration decision Hengdi Shui Fu Jue (2015) No. 24201 of the Hengyang Taxation Bureau according to law. The Zhengxiang District People's Court of Hengyang City made an administrative judgment ([2016] Xiang 0408 Xingchu No. XXX) on May 3, 2016, rejecting the plaintiff's claim; Chen Mouping and Zhang Moujin were dissatisfied and appealed. The Hengyang Intermediate People's Court made an administrative judgment ([2016] Xiang 04 Xingzhong No. XXX) on July 6, 2016, upholding the first-instance judgment. Chen Mouping and Zhang Moujin were still dissatisfied and applied to the Hunan Provincial High Court for retrial. After review, the High Court made an administrative ruling ([2016] Xiang Xing Shen No. XXX), deciding to retry the case.

Before the retrial of this case, Chen Mouping and Zhang Moujin raised an objection to the execution of the profit distribution dispute case between them and Rongsheng Company. On December 14, 2015, the Shigu District People's Court of Hengyang City made an execution ruling ([2015] Shi Zhi Zi No. XXX), rejecting Chen Mouping and Zhang Moujin's objection application. On April 7, 2016, the Hengyang Intermediate People's Court made an execution ruling ([2016] Xiang 04 Zhi Fu Zi No. XXX), revoking the above-mentioned execution ruling.

II. Judicial Ruling Opinions

The first-instance court held that: Based on the investment relationship, Chen Mouping and Zhang Moujin received a total of 396,441 yuan in dividends and interest arising from the delayed payment of dividends from Rongsheng Company. As the withholding agent, Rongsheng Company has the obligation to truthfully declare to the tax authority and report and pay taxes at a rate of 20%.

The second-instance court held that: The item of tax withheld and paid in this case is the execution payment of dividends and interest arising from the delayed payment of dividends confirmed by the people's court judgment. According to Article 2 (7) of the 'Individual Income Tax Law of the People's Republic of China', interest and dividend income shall be subject to individual income tax. Therefore, the withholding agent Rongsheng Company declared to the Shigu District Taxation Bureau and withheld and paid the tax, and the Shigu District Taxation Bureau's issuance of a tax payment certificate for this is not contrary to the law.

The retrial court held that: The focus of the dispute in the second instance of this case is the legality of the Shigu District Taxation Bureau's collection of 79,288.2 yuan of individual income tax from Chen Mouping and Zhang Moujin. The income of Chen Mouping and Zhang Moujin is the interest and dividend income determined by the effective judgment of the court, which falls within the scope of individual income tax. Chen Mouping and Zhang Moujin, who obtained interest and dividend income, are taxpayers of individual income tax and have a statutory obligation to pay individual income tax to the state, which is not exempted due to the compulsory execution by the people's court. When paying interest and dividends, Rongsheng Company, as the 'unit paying the income', declared and withheld tax payments. The Shigu District Taxation Bureau, which has the statutory duty to carry out tax collection and management within its jurisdiction, accepted and collected the tax into the treasury according to law and issued a tax payment certificate, which complies with the law. The Hengyang Intermediate People's Court ruled to revoke the execution ruling ([2015] Shi Zhi Yi Zi No. XXX) of the Shigu District People's Court of Hengyang City, which led to a change in the amount of taxable interest or an undetermined state after the tax levy occurred. However, because the revocation ruling was made after the Shigu District Taxation Bureau levied the tax involved in the case, it does not affect the legality of the Shigu District Taxation Bureau's previous tax levy. In summary, the reasons for the retrial application are not tenable, the original first and second instance judgments found the facts clearly, applied the law correctly, and should be upheld according to law.

III. Tax Lawyer Analysis

Regarding the taxation of interest, dividends, and bonus income in contract disputes, previous articles on the official account have provided detailed introductions with case studies. This issue explores whether the debt interest during the delayed performance period, commonly known as overdue interest, is taxable by analyzing the development and changes of the above administrative litigation case.

1. Although the retrial in this case upheld the original judgment, it substantially shook the tax base

This administrative litigation case went through a first instance rejection of the plaintiff's claim and a second instance upholding the original judgment. The retrial procedure was finally initiated, but the outcome was still to uphold the original judgment. All three judgments supported the tax authority's legal collection of individual income tax on dividends and interest obtained by the original plaintiff, which was withheld by the withholding agent at a rate of 20%. However, a careful study of the retrial judgment reveals that the biggest difference from the first and second instance judgments is that it confirms that the amount of tax payable is still in an undetermined state, and clarifies that after the final determination of the amount of tax payable, if Chen Mouping and Zhang Moujin believe that they have paid more tax than the amount of tax payable, they can request the Shigu District Taxation Bureau to refund the overpaid tax in accordance with the law, and the Shigu District Taxation Bureau should also actively fulfill the relevant statutory refund obligations.

2. The key to initiating the retrial in this case is the miscalculation of overdue interest

The first and second instances of this case determined the amount of dividends and overdue interest based on the "Interest Calculation Report on the Profit Distribution Case of Chen Mouping, Zhang Moujin and Hengyang Rongsheng Real Estate Development Co., Ltd." issued by the Hengyang Shigu District People's Court during the execution of the case. By reviewing the execution documents of the case, it was found that although Chen Mouping and Zhang Moujin raised objections on the grounds of incorrect interest calculation and that individual income tax should not be withheld, the executing court held that the interest calculation in the case was based on the amount determined by the effective civil judgment, calculated according to the standards of the People's Bank of China's current deposit and loan interest rates and the calculation method determined by the execution ruling, and the calculated interest included general debt interest and overdue doubled debt interest. The dividends and interest obtained by the applicants Zhang Guangjin and Chen Liping are within the scope of legally paying individual income tax, so the ruling rejected the application for objection.

Zhang Moujin and Chen Mouping filed an application for reconsideration with the Hengyang Intermediate People's Court against the execution ruling. The reconsideration court held that if the property of the person subject to execution is insufficient to pay off all debts, the monetary debts determined by the effective legal documents should be paid off first, and then the doubled debt interest should be paid off. The executing court failed to calculate the amount of monetary debts and doubled debt interest determined by the effective legal documents that the person subject to execution should pay off in accordance with the above provisions, and should be corrected in accordance with the law. Therefore, the ruling revoked the Execution Ruling No. 10 of Shigu District People's Court (2015).

During the first and second instances of this administrative litigation case, no evaluation was made on the significant changes in the execution ruling and the possible changes in the amount of tax payable. Therefore, the Hunan High People's Court believed that Zhang Moujin and Chen Mouping's application for retrial met the circumstances stipulated in Article 91 (3) of the "Administrative Procedure Law of the People's Republic of China", that is, the main evidence of the facts determined in the original judgment and ruling was insufficient, had not been cross-examined, or was forged, the people's court should retry the case, and ruled that the High People's Court would hear the case.

3. Overdue interest does not necessarily belong to the interest in the tax law sense

Article 253 of the "Civil Procedure Law" stipulates that if the person subject to execution fails to perform the obligation to pay money within the period specified in the judgment, ruling, and other legal documents, the debt interest during the delayed performance period shall be paid twice. The "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Calculation of Debt Interest During the Delayed Performance Period in the Execution Procedure" (Fa Shi [2014] No. 8) stipulates that the debt interest during the delayed performance period calculated twice as stipulated in Article 253 of the Civil Procedure Law includes the general debt interest and the doubled debt interest during the delayed performance period. The general debt interest during the delayed performance period shall be calculated according to the method determined by the effective legal documents; if the effective legal documents do not determine the payment of the interest, it shall not be calculated. The calculation method of the doubled debt interest is: Doubled debt interest = monetary debt determined by the effective legal documents that the debtor has not yet paid off (excluding general debt interest) × 0.000175 per day × delayed performance period.

It can be seen that the debt interest for delayed performance is divided into two types: general debt interest and doubled debt interest. There is no difference in the concept of general debt interest and interest recognized in tax law. They are both remuneration obtained by the owner of funds for lending funds, and are generally higher than the time value of funds. However, the doubled interest is relatively fixed, and the annualized rate of return is 6.36%. It has both the nature of a fund occupation fee and the attribute of liquidated damages. In particular, Article 4 of the Interpretation of Fa Shi [2014] No. 8 stipulates that if the property of the person subject to execution is insufficient to pay off all debts, the monetary debts determined by the effective legal documents shall be paid off first, and then the doubled debt interest shall be paid off, unless the parties agree otherwise on the order of payment. This is inconsistent with the order of payment stipulated in Article 561 of the "Civil Code", that is, if the debtor should also pay interest and related expenses for realizing the creditor's rights in addition to performing the main debt, and its payment is insufficient to pay off all debts, unless the parties agree otherwise, it shall be performed in the order of related expenses for realizing the creditor's rights, interest, and main debt. This also shows that the doubled debt interest is not the same in nature as the general interest.

Delayed performance of debt, regardless of whether it generates general debt interest, will inevitably generate doubled debt interest. When the executed property is insufficient to pay off all debts, according to the current judicial interpretation, this part of the amount is transformed into a part of the main debt. In this case, although the name is still debt interest for delayed performance, the nature has become the return of the lent funds, and of course it does not belong to the taxable scope of value-added tax and income tax. In this case, because the executing court initially simply regarded all overdue interest as interest, and did not consider the actual situation of whether the property executed in this case could pay off all debts, after the execution reconsideration ruling corrected this practice, part of the overdue interest should be regarded as repayment of the principal, so the original tax base also changed accordingly.

In the next issue, we will combine a case where the determination of tax evasion was revoked by the court in accordance with the law to discuss whether the amount of interest determined by the judiciary should be declared, what is the time limit for tax obligations, and how to understand the order of payment stipulated in Article 561 of the "Civil Code" from a tax perspective. Please pay attention.

IV. Reference Cases

1. Chen Mouping and Zhang Moujin's first instance administrative judgment on the administrative certificate of tax payment of the Local Taxation Bureau of Shigu District, Hengyang City, Hunan Province and the administrative reconsideration decision of the Local Taxation Bureau of Hengyang City, Hunan Province (2016) Xiang 0408 Xingchu XXX

2. The second instance administrative judgment on tax administration and administrative reconsideration decision between the appellant Chen Moumou, Zhang Moumou and the appellee Local Taxation Bureau of Shigu District, Hengyang City, Hunan Province, and Local Taxation Bureau of Hengyang City (2016) Xiang 04 Xingzhong XXX

3. Chen Mouping, Zhang Moujin and the retrial administrative ruling of the Local Taxation Bureau of Shigu District, Hengyang City, Hunan Province, and the Local Taxation Bureau of Hengyang City, Hunan Province (2016) Xiang Xing Shen XXX No.

4. Chen Mouping and Zhang Moujin's tax administrative management (taxation) retrial administrative judgment (2018) Xiang Xing Zai XXX No.

5. First instance ruling on the case of Zhang Moujin and Chen Mouping v. Hengyang Rongsheng Real Estate Development Co., Ltd. regarding a dispute over profit distribution (2015) Shi Zhi Yi Zi No. 10

6. Execution ruling on the dispute over profit distribution between Zhang Moujin, Chen Mouping and Hengyang Rongsheng Real Estate Development Co., Ltd. (2016) Xiang 04 Zhi Fu No. 8